Intergovernmental transfers Taxonomy objectives and results Empirical findings
Intergovernmental transfers Taxonomy, objectives and results
Empirical findings of the OECD survey l No clear relation between fiscal autonomy and financial decentralisation l The gap between sub-national tax and expenditure shares has been widening l A high share of grants is often the result of large horizontal imbalances (tax base and spending needs)
Typology of grants q Non-earmarked Ø Mandatory l l Ø q General purpose grants Block grants Discretionary Earmarked Ø Mandatory l l Ø Non-matching grants Matching grants Discretionary l l Capital grants Current grants
Use of grants – results of the survey l l l l Resources other than taxes and grants are scarce Grants are on average 50% for states, regions and provinces States receive over 6% of GDP in grants (1% in Canada to over 10% in Belgium) Grants are on average 40% for local governments Local governments receive on average over 4% of GDP in grants (12. 4% in Denmark, to less than 1% in Belgium, Canada, Iceland Turkey) The central government is by far the most important source of grants In some states, international bodies are an important source of grants
Objectives of grants l Financing sub-national services and investments l Subsidisation l Equalisation
Objective 1: Financing l Why choose grants over sub-national taxes? l l l Central government is better able to control sub-national spending Sub-national taxes may have distortionary effects Sub-national taxation may lead to high inequalities Sub-national taxes may have high administrative and collection costs Why NOT choose grants over taxes? l l Taxes allow sub-national authorities to adapt the level of services to local preferences Asymmetric information and efficient allocation of resources Taxes come with increased accountability Sub-national authorities can’t blame grants for the poor quality of services
Objective 1: Financing Aims of financing grants: l Enable sub-national authorities to finance a basic package of services l Best: non-earmarked general purpose grants l Provide (new) services imposed by the central governement or reach imposed standards l Best: non-earmarked grants
Objective 1: Financing l Distribution criteria l Law-based versus discretionary l Stable and predictable versus buoyant and evolutive l Complex versus simple l Based on norm costs, average costs or actual costs?
Objective 2 - Subsidisation l Aim: compensate for spillover effects l Most efficient: National spillovers: earmarked matching grants l Regional spillovers: stimulation of horizontal co-operation l
Objective 3: Equalisation l Aim: enable sub-national governments to provide similar services at roughly similar tax effort l Types l l l Equalisation of tax capacity Equalisation of service capacity (of spending needs) Best grants: non-earmarked general purpose and horizontal transfers
Equalisation of tax capacity l Solidarity, but also economic reasons (incentive to inefficient migration) l Measure of tax capacity: revenue collected if depleted at a certain uniform (usually average) rate l Caveat: full equalisation removes incentives to increase tax base
Equalisation of service capacity (spending needs) Solidarity and regional/spatial planning (not economic) reasons l Reasons for inequal cost per unit of service: l l Special situation/location Socio-demographic conditions Requires calculation of service cost indicators which l l Are based on average or norm costs Cannot be influenced by sub-national authorities
Decision making Government is a unitary actor that maximizes the social welfare of the nation l But there exists: l l l Critical points in grant design: l l l Central-local loyalties Assymetric information Various forms of lobbying Choice earmarked – non earmarked Distribution formulas Determining tax and service capacity and equalisation level Discretionary grants Efficient decision making: l l Neutral expertise Limit the influence of lobbying Involve sub-national governments In a setting that encourages objective debate
Council of Europe acquis l European Charter of Local Self. Government (Art. 9) l Rec(2004)1 on financial and budgetary management at local and regional levels l Rec(2005)1 on the financial resources of local and regional authorities
On-going and planned work in the Council of Europe l Finalisation of a recommendation on the provision of services at local and regional levels l A new general report on local finance in Europe (update of a 1996 report) l Finalisation of reports on: Accounting rules and practice at local level l Performance management at local level l Internal audit at local level l
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